Investing in China brings different risks and greater unpredictability compared with Western markets. The Chinese government’s recent clampdown on tech firms and education companies illustrates this point. But investors have historically been rewarded with long-term outperformance. Indeed, an investment in the MSCI China Index from January 2000 to the end of August 2021 would have generated a 402% return. In the past, moments of volatility like this have proved to be buying opportunities for many long-term investors.

MSCI China and MSCI ACWI performance since 2000 (in USD, indexed to 100)

There are many ways for investors to buy shares of Chinese companies. This has become even more important during China’s recent regulatory clampdown, which affected some listings – particularly US-listed American depositary receipts (ADRs) and select Hong Kong-listed companies – more than others. With China A-shares constituting almost 70% of China’s total market capitalisation size, China’s capital markets are much broader and deeper than many investors realise.

Major stock exchanges for China equities vs euro area

The regulatory clampdown on tech giants and education firms didn’t affect China A-shares as much as other listings. It’s another reasons for investors to explore the broad universe of Chinese equities – regardless of where the stocks are listed.

• Internet, education and ecommerce stocks tend to be better represented in Hong Kong-listed stocks and US-listed ADRs (American depositary receipts).
• A-shares (stocks of Chinese companies listed on exchanges in Shanghai or Shenzhen) tend to feature more companies in sectors such as industrials, healthcare and consumer goods.

MSCI China A Onshore Index vs MSCI China Index performance since September 2020 (in USD, indexed to 100)

China’s equity markets are appreciated for their long-term potential for outperformance, but they’re also useful as a portfolio-diversification tool. China A-shares have a correlation of 0.32 with global equities over the last 10 years, which means they move in different directions almost 70% of the time. (In comparison, US and global equities have a correlation of 0.97.) Holding A-shares in a global portfolio may help generate a better risk-return profile.

Historical correlation between major equity markets since 2011

Despite the negative news out of China, global investors have continued to add China A-shares to their portfolios. August 2021 marked the ninth consecutive month of positive flows for this share class, suggesting a “buy the dip” mentality. The Chinese government recently helped lay the groundwork for greater cross-border investment with the launch of the Shanghai and Shenzhen Stock Connect schemes in 2014 and 2016, respectively:

• In “southbound” trades, mainland China residents use the Shanghai or Shenzhen exchanges to buy Hong Kong-listed stocks.
• Investors outside of mainland China can use the Hong Kong exchange to buy A-shares in Shanghai or Shenzhen (known as a “northbound” trade).

Monthly northbound net buying via Stock Connect since 2014 (in RMB)

In a sign of China’s growing integration into global financial markets, major stock indices have been adding more Chinese stocks – reflecting the increasing importance of China to the global financial system. But China’s representation in these indices still underplays the country’s significant economic potential. Investors may want to consider allocating more to China than benchmarks do.

Key statistics on China and China equities

China has come a long way in a short time. Once known as the “factory of the world”, it shifted away from low-cost manufacturing towards the high-tech areas that are essential to its growth – and, crucially, its desire for self-sufficiency. A rapidly expanding middle class, increasing domestic consumption, high-tech innovation and a commitment to a carbon-free economy are all key parts of the China growth story.

Source for stats in “China’s path to growth” infographic
1. Source: eMarketer. Data as at 2020.
2. Source: World Bank. Data as at 2019.
3. Source: World Bank. Data as at 2019.
4. Source: World's Top Exports. Data as at 2019.
5. Source: OECD, Allianz Global Investors. Data as at 2018.
6. Source: World Intellectual Property Organization. Data as at December 2019.
7. Source: Goldman Sachs. Data as at July 2020.
8. Source: Hurun Research Institute, Nikkei Asia review. Data as at 2019.
9. Source: Belfer Center for Science & International Affairs.
10. Source: IMF. Data as at 2021.